Do people consider property taxes when deciding where to move? Should they?
Most people do not think about property taxes when considering where to live but they should. Property taxes are used to fund many of the local government services and amenities that make a location desirable, but the tax bills can be large and wreak havoc on a tight budget. In many places, cars are part of the property tax. So if your car is registered in a location that includes automobiles as part of the property tax, you will receive a property tax bill, which will be based in part on the current value of the vehicle. More than that, you may have to pay the bill in one payment when it is due. Depending on the millage rate (property tax rate) and the value of your car, that could be several hundred dollars. If you are a homeowner, you definitely want to be aware of property taxes. Most homebuyers focus on the mortgage interest rate when purchasing a home. But homeowners are also liable for property taxes based on the assessed value of their home. Because the millage rate and value of your home fluctuate over time, property tax liabilities will too. Thus, if the value of your home increases or the millage rate goes up or both, you will owe more in property taxes than you did the year before. An important point is that your home value may increase without your income increasing. This can have consequences on your household budget, as you will have higher expenses but not necessarily more income to cover them. Keep in mind that renters also bear the burden of property taxes, as higher property taxes are typically passed along in the form of higher rents.
Should nonprofits pay property taxes?
Property owned by nonprofit entities (government buildings, churches, mosques, hospitals, schools, colleges, and charities) is not subject to property taxes. By being exempt from the property tax, these properties do not generate tax revenue to fund local government services, such as fire and police protection. In the case of nonprofit organizations with a small physical footprint, this may not have a significant revenue effect on the taxing jurisdiction. But for nonprofits such as universities and hospitals, which may occupy a large swath of highly valuable land, it can result in a substantial revenue loss for the local government. In Connecticut, the state government provides some payments in lieu of taxes, referred to as PILOTs, to the local governments to compensate for some portion of the revenue loss from the presence of state buildings. Universities such as Stanford, Harvard, and MIT, to name just a few also make PILOT payments.
Should local tax policy be adjusted to rely more or less on property taxes versus other forms of taxation?
Property taxes are a significant source of revenue for local governments, such as cities, counties, and school districts. But local governments also rely on transfers of revenue from the state and federal government, users’ fees for some government services, sales taxes, and in some areas even income taxes. Property taxes provide a stable source of funding which is particularly important for local governments. Stable, consistent revenues allow local governments to engage in good budgeting practices and long-run strategic planning. Furthermore, because people receive many government services based on where they live, the property tax provides a strong link between the services you receive and the taxes you pay. But property taxes should be levied in combination with other revenue sources such as transfers, user fees, and sales or income taxes to provide a well-rounded portfolio of funding for government services.
Property tax abatements are often granted for commercial property development or as an incentive for business relocation. When these properties do not contribute to the funding of local government services, their share of the tax burden is shifted to the remaining properties on the tax digest. Thus, if some properties pay less, others will need to pay more. Therefore, it is important to ask if it would not be a better solution for all properties to face a lower rate than for some properties to face a zero rate while some face a higher rate.
Should certain groups of people be exempt from property taxes or be taxed at a lower rate?
There are numerous types of property tax exemptions provided across the US. The available exemptions, if any, depend on the laws governing your town or county. Property taxes are based on the value of your home which typically increases over time, but your income may not. For example, low-income individuals who live in an area that is gentrifying may face the prospect of having to sell their homes because they can no longer afford the property taxes. That is, their home value has increased but their income, which is necessary to make the tax payments, has not kept pace. Seniors who live on a fixed income may also have difficulty keeping up with property taxes over time. To address these issues, some jurisdictions structure property taxes so that lower-income individuals have lower tax liabilities based on their ability to pay. In some areas though, all seniors may be offered exemptions on their property taxes. While that may seem nice, it is not a good policy. Many seniors are financially secure and do not face any difficulty paying their property taxes. Also, it is important to understand that although seniors may not be consuming all the services funded by the property tax, such as local schools, a home has value in part because the schools in the district are highly valued. Therefore, even without children, all homeowners have an incentive to fund the schools. A better approach is to target the property tax exemptions based on income so that the assistance is directed to those in need. Jurisdictions may offer a reduced liability for those without children in school, but it should not be zero. Completely eliminating the property tax for homeowners creates a disincentive for moving to a smaller home or a home in a different area. This limits the housing options for new families and results in urban sprawl.
In order to determine the states with the highest and lowest property taxes, WalletHub compared the 50 states and the District of Columbia by using U.S. Census Bureau data to determine real-estate property tax rates and applying assumptions based on national auto-sales data to determine vehicle property tax rates.
For real-estate property tax rates, we divided the “median real-estate tax payment” by the “median home price” in each state. We then used the resulting rates to obtain the dollar amount paid as real-estate tax on a house worth $217,500, the median value for a home in the U.S. as of 2019 according to the Census Bureau.
For vehicle property tax rates, we examined data for cities and counties making up at least 50 percent of a given state’s population and extrapolated this to the state level using weighted averages based on population size. For each state, we assumed all residents own the same vehicle: a Toyota Camry LE four-door sedan — 2020’s highest-selling car — valued at $24,970, as of February 2021.
Please note that Georgia formerly imposed vehicle property tax but replaced it in 2013 with a one-time tax imposed on a vehicle’s fair market value (FMV).
Sources: Data used to create this ranking were collected from the U.S. Census Bureau and each state’s Department of Motor Vehicles.